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High Lifetime Taxes Have Residents Moving To States With Low Income Tax And No Income Tax.
The dreaded Tax Day is coming fast on April 15, 2024, and it’s a somber reminder of the amount of taxes the average American has to pay over the course of a lifetime. According to a study conducted by Self Financial, a credit-building platform, the average American will pay $524,625 in taxes over the span of a lifetime. This cumulation of taxes is made up of both federal and state taxes.
With high state and federal income taxes, it has been found that New Jersey state residents pay the most in lifetime taxes, coming in at $987,117. Washington, D.C., has the second-highest lifetime taxes at $884,820. The state with the lowest lifetime taxes is West Virginia, with a lifetime tax burden of $358,407.
It is important to mention that this study also includes the estimated amount of taxes paid for all taxes, including cars, homes, clothing, food and drink, entertainment, and personal care.
How Are State And Federal Taxes Calculated?
Federal income taxes in the U.S. are calculated using a progressive system with seven tax brackets. These include10%, 12%, 22%, 24%, 32%, 35% and 37% and they are determined based on your income and filing status. Essentially, this means the more you earn, the higher the tax rate you pay on your increasing income.
State income taxes, however, can vary significantly by state. Some states, like California and New York, have multiple progressive tax brackets. The top rates for these states are relatively high. Some of the other states use a flat tax rate for all income levels. For example, Pennsylvania employs a flat rate of 3.07%, regardless of income level.
Additionally, state tax codes may offer various credits and deductions that can reduce overall tax liability. Unlike federal taxes, some states also allow local income taxes imposed by cities or counties, adding another layer to tax calculations.
The state and federal taxes combined significantly influence the lifetime taxes a resident pays in each state. Understanding how these taxes are structured and calculated is crucial for assessing the overall tax burden and making informed decisions about where to live and work.
Lifetime Taxes Compared to Lifetime Earnings
For most Americans, taxes consume a considerable portion of their income. That is why many individuals have begun to evaluate the amount they earn compared to the amount of taxes they have to spend to determine whether the state they live in is beneficial to them. For instance, those who live in New Jersey pay $987,117 in taxes, which is around 54.3% of their lifetime earnings. This percentage is higher than residents of any other state.
In West Virginia, the residents pay $358,407, which is 28.4% of their total lifetime earnings. While they pay the lowest total taxes in the U.S, those who live and work in Alaska pay the lowest percentage of their lifetime earnings on tax. This is because they pay a lifetime tax of $400,742, which is only 24.5% of their lifetime earnings. The percentage of taxes paid compared to lifetime earnings is an important factor to consider when determining which state is the most cost-efficient to live in.
Americans Are Migrating to States With Lower Income Tax
With taxes becoming a significant burden on most Americans, there has been a significant shift with most Americans moving from high-tax to low-tax states. The recent emphasis on remote work after the COVID-19 pandemic has also made this change possible. A study done by United Van Lines shows that between 2019 and 2022, the number of people who moved to a different state rose from 7.4 million to 8.2 million.
New Jersey was found to have the most residents move to a different state, which is unsurprising considering it was the state with the highest lifetime taxes. California is another state with a high percentage of residents moving to other states in search of lower taxes. The most common states that Americans are moving to include Alabama, New Mexico, North Carolina, South Carolina, South Dakota, West Virginia, and Arkansas.
Nine States With No Income Tax
Many Americans are moving in search of lower income taxes, but there are also plenty of states that don’t have any income tax at all. These states include Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
These no-income-tax states are particularly attractive for those seeking to minimize their overall tax burden. However, it’s crucial to note that while these states do not collect income tax, they may levy higher sales taxes, property taxes, or other fees that can offset the lack of income tax. Living in a state with no income tax can significantly impact retirees and lower-income families, who might benefit more from lower everyday expenses than from a lower tax rate.
Additionally, the absence of state income tax might mean that less funding is available for state infrastructure projects, potentially affecting the quality of roads, parks, and public facilities. Understanding these trade-offs is essential for anyone considering moving to a no-income-tax state, as the initial tax savings could be counterbalanced by other higher costs and reduced services.
Why Should You Live in A High-Tax State?
States with high-income taxes can be expensive, and you will likely pay more during your lifetime, but there are also many reasons you might want to live in a high-tax state.
Aside from weather, location, opportunities, and other factors that make states like California and New York appealing, they also often have better public services. For instance, these can include well-funded public schools, healthcare facilities, and roads.
High-tax states also tend to have higher incomes and earning potential. This can be due to the concentration of high-paying jobs in areas such as Silicon Valley and NYC. These significant career and business opportunities may not be available elsewhere.
